1). A 20-year bond with a face value of $1,000 has a coupon rate

1). A 20-year bond with a face value of $1,000 has a coupon rate of 6.5%, with semiannual payments.

1. What is the coupon payment for this bond? (Round to the nearest cent.)
2. Enter the cash flows for the bond on a timeline.

 

2). The following table summarizes prices of various default-free zero-coupon bonds ($100 face value):

 

Maturity (years)                         1                  2                  3                  4                  5

Price (per $100 face value)         $95.18          $90.65          $85.90          $81.19          $76.13

 

1. Compute the yield to maturity for each bond.
2. Plot the zero-coupon yield curve (for the first five years).
3. Is the yield curve upward sloping, downward sloping, or flat?

 

1. Compute the yield to maturity for each bond.

 

The yield on the 1-year bond is  ____%. (Round to two decimal places.)

3). Suppose a 10-year, $1,000 bond with a 12% coupon rate and semiannual coupons is trading for a price of $1,084.85.

1. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)?

(Round to two decimal places.)

1. If the bond’s yield to maturity changes to 8% APR, what will the bond’s price be?

 

4). Assume the zero-coupon yields on default-free securities are as summarized in the following table:

Maturity                          1 year          2 years         3 years         4 years         5 years

Zero-Coupon Yields                   5.20%           5.70%           6.00%           6.20%           6.40%

 

What is the price of a three-year, default-free security with a face value of $1,000 and an annual coupon rate of 3%?  (Round to the nearest cent.)

 

What is the yield to maturity for this bond?

 

5).  The following table summarizes yields to maturity on several 1-year, zero-coupon securities:

 

                   Security                           Yield           

Treasury                          2.850%

AAA Corporate                          3.288%

BBB Corporate                           3.992%

B Corporate                          4.736%

                                                                            

 

1. What is the price (expressed as a percentage of the face value) of a 1-year, zero-coupon corporate bond with a AAA-rating and a face value of $1,000 (Round to the nearest cent.)
2. What is the credit spread on AAA-rated corporate bonds?
3. What is the credit spread on B-rated corporate bonds?
4. How does the credit spread change with the bond rating? Why?

6). Anle Corporation has a current price of $10, is expected to pay a dividend of $1 in one year, and its expected price right after paying that dividend is $26.

1. What is Anle’s expected dividend yield? (Round to two decimal places.)
2. What is Anle’s expected capital gain rate?
3. What is Anle’s equity cost of capital?

 

7). Summit Systems will pay a dividend of $1.41 one year from now.  If you expect Summit’s dividend to grow by 6.8% per year, what is its price per share if its equity cost of capital is 10.1%? (Round to the nearest cent.)

 

8). Heavy Metal Corporation is expected to generate the following free cash flows over the next five years:

 

Year                                1                  2                  3                  4                  5       

FCF ($ million)                 52.1             67.1             77.4             73.6             80.5

 

After that, the free cash flows are expected to grow at the industry average of 4.4% per year.  Using the discounted free cash flow model and a weighted average cost of capital of 14.6%:

1. Estimate the enterprise value of Heavy Metal. (Round to two decimal places.)
2. If heavy metal has no excess cash, debt of $298 million, and 36 million shares outstanding, estimate its share price.

9).  You read in the paper that Summit Systems will pay a dividend of $2.00 this year.  At that point you expected summit’s dividend to grow by 5.5% per year.  Today you read in the paper that Summit systems has revised its growth prospects and expects its dividends to grow at a rate of 4.0% per year forever.  If the firm’s equity cost of capital is 12.0%:

5. What is the value of a share of Summit Systems stock based on the original expected dividend growth of 5.5% per year? (Round to the nearest cent.)
6. If you tried to sell your Summit Systems stock after reading this news, what price would you be likely to get? Why?

 

10). Assume that Cola Co. has a share price of $43.99.  The firm will pay a dividend of $1.49 in one year, and you expect Cola co. to raise this price dividend by approximately 6.7% per year in perpetuity.

 

8. If Cola Co’s equity cost of capital is 8.3%, what share price would you expect based on your estimate of the dividend growth rate? (Round to the nearest cent.)
9. Given Cola Co’s share price, what would you conclude about your assessment of Cola Co’s future dividend growth?